Misallocation measured by dispersion in revenue to inputs ratio rises in recessions. Can first moment shocks drive business cycles that are consistent with countercyclical misallocation and credit spread? This paper tries to study this question using a quantitative general equilibrium model populating with heterogenous firms facing monopolistic competition and endogenous default risks. The existence of partial irreversibility constraint on fixed capital limits cash flow to finance working capital while the existence of financial friction enlarges the investment inaction zone and disinvestment fire-sale zone. Misallocation and extra default leads to a drop in aggregate output which further drags down aggregate value-added productivity through aggregate demand externality. I find strong sectoral and firm level empirical evidence that are consistent with the model. Quantitative results show that a countercyclical fiscal policy can mitigate the recession by boosting aggregate demand, resulting from a rich interaction between liquidity, asset price and financial frictions.